The objective of this simulation is to illustrate how changes in the demand and supply conditions in one market can influence the demand and supply conditions in other markets.

This simulation focuses on how changes in the coffee market will influence the equilibrium price and quantity for tea and milk.

If we assume that coffee and tea are substitute goods then consumers will switch between the two depending on what happens to the relative price of the two products. If it is also assumed that the people drink milk with their coffee, then coffee and milk would be complementary goods. Therefore, people will change their demand for milk depending on what happens to the demand for coffee.

The price of coffee

The price of raw coffee on the international market has been falling over time. This is illustrated in the diagram.

The price of coffee in the future is expected to be one of a general rise between May 2001 and May 2002.

The model assumes that the demand for tea and milk is only determined by the price of coffee.

We use models in an attempt to explain or predict outcomes.

A model simplifies the relationship between various economic factors. This simplification of the complex interactions between individuals, groups and institutions relies on the ceteris paribus assumption. In other words, other things being equal or unchanged.

The simulation allows the individual to simulate the impact on the equilibrium price and output and the total revenue situation in the coffee, tea and milk markets for a given change in the demand and supply conditions in the coffee markets.

Note: The model assumes a single causal relationship, i.e., the price of coffee is the key determinant of the demand for milk and tea. These goods are not affected by changes in other determinants.

You can download an Excel version of the original spreadsheet (Excel 97).

The model settings for the inputs are;

• World income: stable, increase, decrease
• Income tax: stable, increase, decrease
• Advertising budget: stable, increase, decrease
• Corporation tax: stable, increase, decrease
• Harvest conditions (coffee): stable, good, poor
• PED of Coffee: -0 to -2.1
• PES of Coffee: -0 to -2.1
• PED of Milk: -0 to -2.1
• PES of Milk: -0 to -2.1
• PED of Tea: -0 to -2.1
• PES of Tea: -0 to -2.1
• CPED Milk & Coffee: -0 to -2.2
• CPED of Tea & Coffee: -0 to -2.1
• AED of Coffee: -0 to -2.1

Interrelationship between markets home page »»